VZCZCXYZ0011
RR RUEHWEB

DE RUEHQT #0102/01 0272019
ZNR UUUUU ZZH
R 272017Z JAN 10
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0700
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS
RUEHGL/AMCONSUL GUAYAQUIL
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RUEHQT/AMEMBASSY QUITO

UNCLAS QUITO 000102 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EFIN EINV USTR EC
SUBJECT: Ecuador Economic News, December 2009 - January 2010 
 
REF: 09 QUITO 1057; 09 QUITO 930 
 
¶1. (U) The following is a periodic economic update for Ecuador that 
reports notable developments that were not reported by individual 
cables during the December 2009-January 2010 timeframe.  This 
document is sensitive but unclassified.  It should not be 
disseminated outside of USG channels and should not be posted on 
the internet. 
 
 
 
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Highlights 
 
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-- Suspension of electricity rationing 
 
-- Ecuador retires more than $50 million in global bonds 
 
-- Ecuador's balance of payments recovers 
 
-- Balance of payments safeguards to be gradually reduced 
 
-- GoE closes deposit insurance agency 
 
-- Increase in remittances tax entered into force January 1, 2010 
 
 
 
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Suspension of electricity rationing 
 
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¶2. (SBU) On January 20, Ecuador's Minister of Electricity and 
Renewable Energy, Dr. Miguel Calahorrano Camino, announced the 
indefinite suspension of electricity rationing.  Starting November 
5 the GoE resorted to the rationing - scheduled blackouts -- to 
control demand during semi-drought conditions that greatly reduced 
hydroelectric output.  The GoE has relied on thermoelectric 
generators and electricity purchases from Colombia and Peru to fill 
the gap during past dry seasons.  However, these measures were 
insufficient to meet demand this year (see Ref A for additional 
detail).  Recent rainfall, rationing, and purchase and rental of 
additional generating capacity eventually allowed Ecuador's main 
reservoir at the Paute dam to fill to a level sufficient to 
increase hydropower generation.  Although this has relieved the 
need for rationing, the GoE cautions that a return to rationing 
could be necessary if water levels at the Paute dam again fall too 
low. 
 
 
 
¶3. (SBU) The scheduled blackouts caused inconvenience and major 
economic losses.  While the government reports these losses at $500 
million, private sector analysts estimate losses are closer to $1 
billion.  Small businesses that lacked generators were the hardest 
hit as blackouts sometimes lasted as many as 5 to 8 daylight hours 
per day, with the longest blackouts occurring in the coastal 
regions - and especially highly industrialized Guayaquil.  As a 
consolation, the GoE has announced a 10% and 20% discount on 
electricity to residential and commercial users respectively for a 
period of three months beginning February. 
 
 
 
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Ecuador retires more than $50 million in global bonds 
 
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-- 
 
¶4. (SBU) On December 30, Ministry of Finance Elsa Viteri announced 
that Ecuador retired $55 million of 2012 and 2030 global bonds in 
an operation with Italian holders aimed at buying back debt the 
government defaulted on in December 2008.  According to Minister 
Viteri, about $190 million in defaulted debt remains outstanding. 
Background: Ecuador refused to pay $3.2 billion in global bonds in 
December 2008, claiming there were irregularities in the issuance 
of the debt in 2000 after the renegotiation of a previous default. 
Italian investors, for internal regulatory reasons specific to 
Italy, were unable to participate in the bond repurchase operation 
held in June 2009, in which the GOE paid 35 cents on each dollar 
worth of debt.  The same price was offered to Italian bondholders 
who participated in this operation.  During the June 2009 buyback, 
the GoE successfully repurchased $2.9 billion or 91% of the 
country's 2012 and 2030 global bonds via a modified Dutch auction. 
 
 
 
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Ecuador's balance of payments recovers 
 
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¶5. (SBU) Ecuador's balance of payments ran a surplus of $24.6 
million for the first nine months of 2009.  During this time 
period, exports fell 37% and imports decreased 21%, compared to the 
same period in 2008.  While the surplus was significantly lower 
than the $3.05 billion surplus for the first nine months of 2008, 
it represented a sharp improvement from the first half of 2009. 
The turnaround reflected the strong surplus in the third quarter of 
2009 of $1.94 billion, a marked recovery from deficits of $1.3 
billion and $580 million recorded in the first and second quarters 
of 2009, respectively.  This recovery is mainly attributed to the 
increase in oil export earnings during the second half of 2009, the 
partial recovery of remittances from abroad during this same 
period, and the financing received by the GoE from China and the 
IMF.  In addition, the GoE argues that the balance of payments 
safeguards imposed in January 2009 were a major factor in the 
reduction of imports in 2009.  As a result of these combined 
factors, both the current account and the capital account reflected 
surpluses in the third quarter of 2009. 
 
 
 
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Balance of payments safeguards to be gradually reduced 
 
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¶6. (SBU)  Resolution 533 of Ecuador's Foreign Trade and Investments 
Council (COMEXI), which was published on January 15, 2010, 
confirmed  the GoE's intention to continue balance of payments 
safeguard measures beyond the one-year term allowed under WTO 
rules.  The safeguards were originally applied on January 22, 2009. 
The resolution indicated that the safeguard measures --  ad-valorem 
and specific tariff surcharges -- would be reduced by 10% effective 
January 23, 2010.    According to local press, President Correa 
instructed COMEXI to reduce the total tariff surcharges gradually 
over six months.  COMEXI will meet periodically during this 
six-month period to confirm the rate with which the GoE will reduce 
the safeguard tariffs. 
 
 
 
¶7. (SBU) President Correa has announced in public remarks that the 
GoE may decide to put in place specific trade restrictions to 
reduce foreign competition and support local production of 
sensitive sectors, such as footwear, leather, and textile and 
apparel industries.  Correa claims that these industries face 
"unfair competition" from countries such as China.  However, he and 
 
other GoE officials have provided assurances that the GoE would 
comply with its WTO commitments in applying these protections. 
 
 
 
¶8. (SBU) GoE officials argue that the BoP trade restrictions 
contributed to the 21%, or $2.75 billion, decline in imports over 
the first nine months of 2009 (compared to the same period in 
2008), and also promoted an increase in sales of local footwear and 
apparel products.  Coordinating Minister for Production Nathalie 
Cely, who presides over COMEXI, has stated publicly that in 
addition to the safeguards, the GoE's implementation of different 
plans to increase the country's competitiveness played a role in 
reducing imports.  Cely justified the gradual reduction of the 
safeguards as necessary to avoid an "avalanche of imports." 
 
 
 
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GoE closes deposit insurance agency 
 
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¶9. (SBU) On December 31, 2009, the GoE closed Ecuador's Agency for 
Deposits Insurance (AGD), adhering to a deadline demanded by 
President Correa.  The GoE created the AGD in 1998 to insure bank 
deposits and liquidate the more than 40 financial institutions that 
went bankrupt during debilitating financial crisis of the late 
1990s.  In late 2009, Correa, frustrated with the AGD's lack of 
progress, ordered the Superintendent of Banks to close AGD and 
complete the liquidation of the 33 banks remaining from the 
original list of over 40. 
 
 
 
¶10. (SBU) The Bank Superintendent accomplished the task of closing 
down the AGD and 28 of the 33 failed banks by transferring all 
assets to Ecuador's Central Bank.  In total, the Central Bank has 
received a loan portfolio of about $2 billion and over 6,000 
insolvency and bankruptcy cases.  It is establishing a special unit 
to resolve legal and financial issues related to these assets, 
collect amounts owed to the failed banks, liquidate assets seized 
from shareholders, and reimburse deposits to clients.  The Bank 
Superintendent was unable to conclude the liquidation of five of 
the 33 financial institutions -- Progreso, Filanbanco, Los Andes, 
Benalcazar and Tecfinsa - but has announced its intention to do so 
during the first quarter of 2010.  In addition, it has announced 
plans to disclose a list of directors, managers and bankers that 
caused the failure of these 33 financial entities and losses to 
third parties, and also warned that it may pursue legal actions 
against these individuals. 
 
 
 
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Increase in remittances tax entered into force January 1, 2010 
 
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¶11. (U) On January 1, 2010, the GoE's latest tax reform bill, 
 
pending since August 2009 and designed to boost revenue and limit 
dollar outflows, entered into force (Ref B).  The law passed by the 
National Assembly establishes a 12% Value Added Tax (VAT) on 
newspaper print, a minimum income tax on companies, and a tax on 
shareholders' dividends.  The most controversial element, 
particularly for multinational companies, is the increase of the 
tax on outgoing capital flows from 1% to 2%. 
HODGES